Especially German bonds rallied on Friday in a flight-to-quality move, curves bull-flattened, spreads widened and equities took a beating. The German 10-year yield fell by close to 5bp, back to below 1.50% and not far from the 1.47% 10-month low reached earlier this month. In the US, the 10-year yield retreated by some 2bp.
Bonds are set to give up some of their gains from Friday today, but bigger losses are not in the cards until later in the week, at the earliest.
Losses in the equity markets were around 1% on both sides of the Atlantic (S&P 500 down by 0.81%) on Friday, and the more negative mood has largely prevailed in Asian markets overnight. European equities are still set to open slightly higher.
The credit rating agency Fitch raised its rating on Spain from BBB to BBB+ with a stable outlook on Friday. Fitch now has the best rating on Spain among the three main agencies.
LTRO repayments continue – money market conditions continue to tighten
The ECB announced on Friday banks would repay another EUR 9.6bn of 3-year LTROs this week, which will put further upward pressure on short money market rates. In light of the clear uptrend seen in the overnight rate lately, it will be quite interesting to see, what the demand will be at this week’s main refinancing operation. The overnight rate fixed at 33bp on Friday, and the latest moves cannot be accounted for solely by the looming end of the month, which has typically been only associated by a jump in the last day of the month. Somewhat reassuringly, short Eonia swap rates have not climbed during the past few days, but this can also be seen as illustrating expectations that the ECB will not allow money market rates to remain at elevated levels.
Tighter money market conditions are something that the ECB has explicitly mentioned as a trigger for further easing, so if the tensions continue to build, the ECB may need to do something already next week.
ECB to reveal stress test scenarios – more sanctions on Russia
The ECB and the European Banking Authority are due to release more details about the upcoming bank stress tests this week, likely today. Some of the details have already been leaked via Bloomberg, according to which a stress scenario would include a global bond rout and a currency crisis in central and Eastern Europe. According to Bloomberg, the total impact of the shocks on GDP would be 7 percentage points of growth below the European Commission forecasts over the three years through 2016. The actual release of the details is unlikely be a big market-mover.
The US and EU, in turn, are expected to announce more sanctions on Russia as early as today. These sanctions are unlikely to be harsher than feared, and should not lead to renewed market worries at this point.
In today’s economic data calendar, the US March pending home sales index will be out at 16:00 CET. The ECB’s Noyer, in turn, is set to speak at 10:00 CET.
Huge week ahead: Euro-zone inflation, Fed, US payrolls…
This week’s calendar looks extremely heavy. In the Euro-zone, a rebound in April flash inflation on Wednesday might not necessarily ease the near-term pressure on the ECB to act, as it would lift rates and strengthen the euro (i.e. lead to tighter monetary conditions). Q1 GDP numbers from the UK will see daylight tomorrow, while the ECB will release the latest results of its bank lending survey on Wednesday.
In the US, the highlights include Q1 GDP and the Fed’s monetary policy announcement on Wednesday, the manufacturing ISM on Thursday and the US April payrolls report on Friday.
In addition, corporate earnings reports will continue, with e.g. 138 S&P 500 companies due to report.
New 15-year French benchmark and Italian auctions ahead
This week’s auction calendar looks much calmer compared to last week, but there is still some action in store. Italy will sell 5-year bonds for EUR 2.75 to 3.5bn, 10-year bonds for EUR 2.5 to 3bn and 5-year floaters for EUR 1.75 to 2.5bn tomorrow. France, in turn, will launch a new 15-year benchmark (May 2030) and sell 10-year bonds for a combined EUR 7 to 8bn on Wednesday.
Coupon and redemption payments of more than EUR 30bn from Spanish and Italian bonds should give a further boost to these markets.
Nordea